The set-up for the big battle was the Fiscal Cliff charade. That hyped drama in the last days of December was a moment of truth for the Democratic Party and for President Barack Obama to make it clear whether they were still defenders of the New Deal legacy, or whether they were ready to toss Social Security overboard on behalf of the party’s new constituency: the Wall Street gang.

The president and the Democrats in House and Senate could have said there would be no deal on the artificial Fiscal Cliff that was created by Congress back in August 2011 unless Congressional Republicans agreed not to hold the nation hostage again this February over the issue of raising the national debt ceiling. Republicans were in a weak position, since if the “cliff” deadline were allowed to pass, the Bush tax cuts would have expired. They would have been put in the position of being unable to pass new legislation restoring tax cuts for the wealthy, while Democrats could have forced them to pass tax cuts for those in the middle and lower classes.

Instead of doing that, the president and his vice president, former Senator from the über-corporate headquarters state of Delaware, Joe Biden, offered a “compromise” that give tax breaks to the 1% of Americans who earn between $250,000 and $400,000 a year, protected up to $5 million in estate value from inheritance taxes, gave corporations billions of dollars in new tax loopholes, and left the GOP free to hold Congress and the Country hostage in February and March when Congress has to pass a new increase in the debt ceiling.

Senate Majority Leader Mitch McConnell (R-KY) has already said that the Republicans in that house will not agree to any tax increases in a debt ceiling deal, and the Republicans who control the House have already made the same thing clear.

The Republicans have also said that they want significant cuts in “entitlements” (the term that has been successfully attached to both Social Security and Medicare, though actually both programs are earned benefits paid for by workers and their employers over a lifetime of employment). And with the government held hostage in February, and unable to borrow further without a rise in the debt ceiling, Democrats will have an excuse to go along with their demands, claiming that they had “no choice.”

The New York Times on Sunday weighed in with its own artillery in this attack on Social Security, with an article in its Sunday Review opinion section by two academics who claim that the program is facing a “huge cliff” and will run out of money two years sooner than the Social Security Administration has been claiming, which would mean 2031. Technically, of course, Social Security is not going to run out of money even in 2033. It is only expected to exhaust the Trust Fund, leaving current workers’ contributions still funding 75% of benefits, indefinitely. But the authors of this Times scare story fail to mention that point.

No surprise there. The same article also suggested that maybe people shouldn’t be encouraged to retire, since retirement, they claim, leads to shorter life expectancy. Easy to say if you are an academic at a private Ivy League school earning a big six-figure salary to write articles, but not so easy to buy into if you’re a working stiff. They also suggest that maybe there should be lower benefits for those retirees earning more than the lordly sum of $43,000 a year in retirement. Unmentioned in the article’s biographies of the two authors is that one, Samir S. Soneji, is a professor with the Dartmouth Institute for Health Policy and Clinical Practice, a conservative industry-funded “institute” that is dedicated to cutting the cost of health care through “market-based” solutions.

The truth about Social Security is that it is not in crisis. After all, 2033, or even 2031, is a long way off from 2013. Two decades off in fact. What other crisis facing the US can you think of that Congress is preparing for two decades in advance? The answer is none. I can, in fact, think of a real crisis that is two decades off that Congress is blithely ignoring, and that is the global climate crisis. In two decades, if there is no major action to reverse the pace of carbon emissions into the atmosphere, it will be too late to do anything to stop runaway heating of the seas and the atmosphere, which will be a much more serious disaster than exhausting the Social Security Trust Fund! Yet Congress and the president are doing nothing about climate change. Why? Because corporate interests, which only care about making profits over the next quarter or at most the next year, don’t want to be burdened by regulations and taxes designed to force them to reduce their carbon emissions. Those same corporations, and especially the financial interests on Wall Street, happen to want to destroy Social Security in order to force workers to invest in the stock and bond markets that they now thoroughly manipulate, instead of relying on a retirement system that has worked well for over three quarters of a century!

How could Social Security be fixed so that the Trust Fund would not run out? Actually the solution is surprisingly easy. All it would take would be to eliminate the cap on income subject to the FICA tax, which is currently set at $113,000, and to levy a small FICA tax either on investment income (not including retirement savings accounts), or on stock and bond trades that are not held in retirement accounts. In other words, if the wealthy and their employers were required to pay the full FICA tax on all their earned income, and to pay FICA taxes on their so-called “unearned” income, there would be no shortfall at all, right through the retirement years of the Baby Boom generation and beyond.

How on earth is that a “crisis”?

Only because raising those taxes is outside the realm of permissible discussion in Congress, and because the media, like the New York Times in its article, do not discuss it. Okay, the Times authors of the article in question did mention raising the income cap subject to the FICA tax, but they only discuss that option in terms of solving what they said was the shortfall that would lead the Trust Fund to run out two years sooner than already expected. They don’t mention that simply eliminating the cap, as opposed to raising it, together with taxing investment income, would solve the problem of a shortfall in funds completely.

So the battle is on.

The next phase of that battle will be an effort by Wall Street’s handmaidens in Congress and the White House to start trying to split the generations by saying that they will “protect” Social Security for those at or nearing retirement age, while weakening the program (they’ll call it “preserving” the program) for younger workers. This is what is known as divide-and-conquer. It is critical for retirees and near-retirees to resist this cynical tactic and to unite with younger workers to protect benefits for all. If the divide-and-conquer strategy were to succeed, younger workers would immediately start to lose interest in Social Security, and pressure would build among them to start cutting benefits for current retirees, since they would see their own FICA taxes as going to subsidize benefits for the retired that they themselves would never receive.

The only way to protect Social Security is for all workers to be in it together defending the same system of benefits. And the only way to do that is to demand and insist on raising taxes on the rich to support that system.

And the key point to make in that battle is that the rich are not being asked to pay more. They — and their employers — are just being asked to pay the same tax rate that the rest of us pay on their income, and to finally start paying FICA taxes on their investment income, which to date has been exempt from Social Security taxation.

Make no mistake: the war against Social Security has been launched, and a key battle is coming in February. The broad mass of workers in the US who are depending upon Social Security for their old age or in the event of disability and an inability to work need to unite and engage in that battle now or it will be lost.

Dave Lindorff is a founder of This Can’t Be Happening and a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. Hopeless is also available in a Kindle edition. He lives in Philadelphia.

'Shared Sacrifice' Is for Suckers: 7 Common Sense Thoughts on Washington's Budget Bedlam

The richest 1% have waged war against the rest of us; Now is time to fight back and fight back hard

by Robert Borosage

Washington is careening off the fiscal cliff smack into the debt ceiling. These mind-numbing mixed metaphors are not the currency of a well-governed nation.

Once more, Washington is fixated on what and how to cut. Once more, the media is clamoring for a deal, for “shared sacrifice.” Once more, Republicans have indicated that they are prepared to hold the full faith and credit of the United States hostage to exact deep cuts in spending, with Social Security, Medicare and Medicaid their primary targets. Once more, the president has indicated that he wants more deficit reduction, with a “balanced” program mixing spending cuts with tax hikes.

“Our government, “ wrote Supreme Court Justice Louis Brandeis, “is the potent, the omnipresent teacher.” But in Washington’s budget bedlam, reason gets lost in the din. As we hurdle the sequester while bouncing off the debt ceiling, it’s worth remembering some basic common sense about where we are.

1. The economy is still broken

More than 20 million people are still in need of full-time work. Wages are falling. Family wealth – largely the values of their homes – has been decimated. The middle class is sinking. Trade deficits are over $1 billion a day. Corporate profits are setting records as percentage of economy; wages are at new lows. Inequality is at record extremes. Catastrophic climate change is already wreaking havoc. This economy does not work for working people.

2. You can’t “fix the debt” without fixing the economy

The furious debates and painfully exacted deals on cuts and taxes will be washed away if the economy goes back into recession. More workers will be thrown out of work. More families will lose their homes. More children will go hungry. Tax revenues will fall; spending will soar on unemployment and food stamps and other supports for those thrown out of work.

“Shared sacrifice” is for suckers. It is neither just nor sensible to demand sacrifices be shared by the predator and the prey.

Despite the Bush tax cuts, two unfunded wars, and the unfunded prescription drug company rip-off program, the annual deficit was less than 2 percent of gross domestic product in 2007 and the accumulated national debt was under 40 percent of GDP. Then Wall Street’s excesses blew up the economy, exploding the housing bubble, and created a recession with mass unemployment, driving us into trillion-dollar deficits that will end up more than doubling the debt burden.

If the economy is fixed, deficits and the debt burden will decline. The best and necessary deficit reduction program is to put people to work. In fact, even the modest growth we’ve witnessed since 2009 has reduced the deficit by about 25 percent relative to the size of the economy, declining faster than any time since the demobilization after World War II. Jobs and growth are essential to any deficit reduction agenda. The worst thing we can do is to endanger growth

3. You can’t fix the economy by “fixing the debt”

And threatening the faltering recovery is what Washington is doing. You can’t cut your way to prosperity. Austerity – spending cuts and tax hikes – costs jobs, slows growth and threatens a return to recession that will explode deficits. Austerity has helped to drive Great Britain and the European Union back into recession. It would be ruinous to repeat that experiment here.

Virtually unanimous bipartisan agreement on this reality drove the frenzy to avoid going over the infamous “fiscal cliff,” the spending cuts and tax hikes piled up by Washington to scare itself into action.

The fiscal cliff melodrama added $600 billion in taxes over 10 years, including a 2 percent tax hike on working Americans with the expiration of the payroll tax holiday. That will likely slow growth by nearly 2 percent of GDP and cost about a million jobs. It comes on top of the $1.5 trillion in spending cuts imposed in the last debt-ceiling debacle. These also are costing jobs and dragging down a weak recovery. Now Washington is descending mindlessly into another hostage crisis about more cuts without apparent concern for the economic effects.

4. You can’t “recover” to the old economy

This economy wasn’t working for working people before the Great Recession. The middle class was sinking; the richest 1 percent captured two-thirds of the rewards of growth. Families stayed afloat by taking on more debt. Good jobs were being shipped abroad. We can’t go back to the old economy that was built on bubbles and debt, and we shouldn’t want to. But a slow growth recovery won’t address these challenges. More cuts in spending or token stimulus won’t help.

5. You can’t build by focusing on what to dismantle

We need fundamental reform, a new strategy for the economy that will rebuild the middle class. That involves far different questions than what programs to cut and whose taxes to hike.

A new strategy must address the real challenges we face and the opportunities we have. Low interest rates give us an historic opportunity to launch a 10-year program to rebuild America’s decrepit infrastructure, from sewers to the electric grid, and modernize it to meet the challenge of catastrophic climate change. The global consensus against extreme trade imbalances provides the opportunity for a new strategy in the global economy that will expand but balance our trade, and make things in America once more. With sensible policy, America’s capacity for innovation provides us the opportunity to lead rather than lag in the green industrial revolution that is sweeping the world.

To revive the middle class, we need to empower workers to gain a fair share of the profits they help generate, lift the minimum wage and curb perverse CEO compensation packages. To provide our children with a world-class education, we have to invest in the basics, from pre-kindergarten to affordable college. Financial constraints should force a cutback of our commitments to police the world. These and many other needed reforms will require new investments, progressive tax reforms and new priorities. But simply cutting spending or raising taxes to reduce deficits won’t get it done.

6. Washington needs more Hippocrates and less hypocrisy.

In the short term, the president and Congress should first do no harm. Call a halt to this inane hostage-taking. Repeal the sequester – the automatic spending cuts designed as a time bomb to force action. Amend the debt ceiling to rise automatically to meet congressional obligations unless the Congress acts affirmatively to renege on what it has voted. Stop laying waste until we get a good sense of whether the faltering recovery can withstand the cuts and tax hikes already passed. Americans are sensibly turned off by the farcical Washington face-offs. And they will be rightfully furious if the folly drives the economy back into recession.

7. Focus on the predators, not the prey

As part of focusing on real reforms, Congress should address the sole source of the deficit projections that are used to terrify everyone. Instead of chopping away at the pillars of family security – Social Security, Medicare and Medicaid – fix our broken health care system. If we spent per capita what other industrialized countries spend on health care (while getting better public health results), we would right now be projecting surpluses as far as the eye can see. The good news is that costs haven’t been rising as fast as expected. Understanding how to build on what is working is a sensible next step. For savings, take on the culprits — the powerful drug and insurance company lobbies, the private hospital complexes that profit from driving our health care costs up.

In any case, “shared sacrifice” is for suckers. It is neither just nor sensible to demand sacrifices be shared by the predator and the prey. It doesn’t make sense to ask everyone to sacrifice when the top 1 percent has captured 93 percent of the country’s income growth as it did in 2010. It makes no sense to cut spending on everything when long-term deficits are driven by one thing – our broken health care system. And it makes no sense to cut everything without being clear about what we need to build.

At the end of World War II, our debt burden was about 125 percent of GDP – far higher than it is now. Yet our leaders were focused on how to put the GIs back to work and avoid a return to the Depression. So they enacted the GI bill to educate a generation. They subsidized housing and built the suburbs. They converted wartime industries to peacetime development. They launched the Marshall Plan to rebuild Europe and create markets. They built the interstate highway system to pave way for a national market. They fought over deficits and budgets, but they did what needed to be done. And they built the first broad middle class in the world’s history that made America exceptional.

They fixed the economy. They generally ran deficits and added to the nominal debt. But the economy grew far faster and by 1980, the debt was down to below 40 percent of GDP and not a concern. They are remembered as the great generation. We might learn a thing or two from them.

The corporate-driven campaign didn't get everything it wanted with the fiscal deal, but it's likely to continue to be a major force as budget talks continue

by Sarah Anderson and Scott Klinger

Over the last three months, the Fix the Debt campaign, led by more than 100 big company CEOs, has unleashed a firestorm of ads, blanketing political news web sites and entirely plastering the Capitol South Metro station used by most Congressional staffers.

In late October, the Institute for Policy Studies began exposing the Fix the Debt campaign's Trojan Horse. While they presented themselves as a patriotic bipartisan group, merely seeking a “balanced” deal, their own lobby materials revealed they were out to use the fiscal cliff as an opportunity to win massive new corporate tax breaks paid for with cuts to earned benefit programs like Social Security and Medicare.

The hypocrisy was stunning. We documented, for example, how many of the campaign’s leaders had contributed massively to the national debt through tax-dodging tricks. Twenty-four of them had even paid their CEOs more in 2011 than their firms paid in corporate income taxes. We also calculated that the average Fix the Debt CEO calling for cuts to Social Security themselves had pension assets of $12 million, enough to garner a $65,000 monthly retirement check starting at age 65.

Did all their high-priced subterfuge pay off? The New Year’s deal was a huge disappointment for those of us hoping that President Barack Obama would use his bargaining position to strike a strong blow against the extreme inequality that is undermining our economy and democracy. But the Fix the Debt campaign also suffered a loss. After one of the most ambitious corporate lobby campaigns in history, they failed to win any of their three major objectives:

•Shifting to a territorial corporate tax system, which would grant a permanent corporate tax holiday on offshore income, including the hundreds of billions stashed in the world’s tax havens. Fix the Debt companies alone stood to gain an immediate $134 billion windfall from this reform, according to an IPS analysis.

In a press release, Fix the Debt leaders lamented that “Washington missed this magic moment to do something big to reduce the deficit, reform our tax code, and fix our entitlement programs.”

As in the tale of the Trojan Horse, however, we cannot assume that the Fix the Debt army is going to just sail away. Corporate tax reform is expected to be a major focus of Congress in 2013, starting as early as the debt ceiling fight, which is likely to come to a head in March. (By then, we expect to be able to report on how many profitable U.S. corporations avoided paying taxes in 2012.)

Congress’s New Year’s Eve capitulation to its wealthiest benefactors heightens the stakes for the corporate tax fight. Because Congress and the White House lavished so much on high-income individual taxpayers, they may well find themselves with fewer goodies to pass out to corporations. These will have to be paid for with either higher deficits or even more draconian cuts to Social Security, Medicare, and other programs ordinary Americans depend upon.

As Iowa Senator Tom Harkin stated in opposition to the fiscal cliff deal: “Every dollar that wealthy taxpayers do not pay under this deal, we will eventually ask Americans of modest means to forgo in Social Security, Medicare and Medicaid benefits.”

The Fix the Debt gang is likely to be a major force for the duration. Last fall they boasted of having $60 million for the “initial phase” of their campaign. Even if they’ve completely blown through that pile of dough, they will likely have no trouble securing additional mega-millions for the battles to come.

Sarah Anderson directs the Global Economy Project of the Institute for Policy Studies, a progressive multi-issue think tank, in Washington DC. She’s also the co-author of the IPS report, America’s Bailout Barons: Taxpayers, High Finance, and the CEO Pay Bubble.

Scott Klinger is an Associate Fellow at the Institute for Policy Studies

In July 1949 John Snyder, Secretary of the Treasury, met Douglas Abbott, the Canadian Finance Minister, in London. There both were informed by Sir Stafford Cripps, Chancellor of the Exchequer, that the British financial situation was precarious indeed. British monetary reserves of gold and dollars were low and getting lower, although Britain appeared to be enjoying an industrial boom with full employment and high prices. (MG: OMG! A disaster in the making with full employment! Lord, please save us from the horrifying situation of full employment and high prices!) Indeed, this presoperity was, quite paradoxically, a cause of the trouble (PARADOXICALLY my eye). ln countries of what was called the sterling area deposited their reserves in London. since pounds sterling were not freely convertible into hard currencies, principally dollars, these depositers, when they wished to make purchases, which they were eager to do for their own internal development, found it easier to make them in Britain or other countires of the sterling area. This situaion, in effect, gave Britain a protected market at higher prices than would be competitive in the United States, so that she was paying her depositors with exports and using up her reserves to buy raw materials and food. This was almost a sure route to bankruptcy (Because the dollar, even then, was a FIAT CURRENCY, and the British Guv couldn't print them, although, paradoxically, the U.S. government could).

Sir Stafford wanted to talk about what should be done. John Snyder interpreted this as a euphemism for help and got out of the country as fast as possible, with the suggestino that talks be held in Washington at the time of the International Bank and Fund meeting in September. He flew back like a modern Paul Revere crying "The British are coming!" and come they did to create a situation of great complexity and embarrassment. Someimte before it had been decided to take advantage of the presence of the finance ministers in Washington to get the foreign and defense ministers of North Atlantic Treaty countries there alwo so that a start could be made on treaty organization and plans in their diplomatic, military, and financial aspects. To all of these was added the unplanned influx of foreign diplomats coming to the United States for the fourth meeting of the General Assembly of the United Nations. In the midst of this considerable and busy international gathering, we now proposed to add Anglo-American-Canadian discussions of great delicacy and secrecy.

...

One can readily imagine the quandry of Ernest Bevin and Sir Stafford Cripps when they arrived in Washington on September 5 with the secret authority of the British government to take up with the International Monetary Fund the devaluation of the pound sterling from $4.03 to $2.80. They could not discuss this until it was done, and without knowledge of this essential fact discussion of Britain's economic crisis was futile. furthermore, discussion of currency matters had been excluded from the agenda of the American-British-Canadian meeting, since they fell within the jurisdiction of the Fund, about to convene its annual meeting.

...

The first few days of the the meeting were everything a conference should not be, and too many are--a complete waste of time with rising exasperation among the conferees. Hoffman announced that the European Recovery Program would be completed in 1952 and that the European countries should plan to have the balance-of-payments problems solved by then. The American delegation turned down a British request to waive Article 9 of the British-U.S. Loan Agreement of 1945-46, prohibiting discrimination against United States exports (how amusing; how quaint; discrimination against United States exports - this hearkens back to a much different day - now that we have NAFTA, CAFTA, etc, etc, etc, and basically do not give a flying fig about the American worker, whose wages, when adjusted for inflation have stagnated (rather than declined) only because the American worker's spounse (in many situations) too has gone to work), in an effort to lessen the outflow of dollars (the dollars are leaving, the dollars are leaving!). Then Paul Hoffman, who had an evangelical delivery and faith in salvation by esports, exhorted the British to forgo the easy markets of the sterling area, cut their costs--which obviously included wages and some of the welfare state--and earn dollars by exporting to the American market.

This was too much for Ernie Bevin, who ... [departed] from the scenario, much to his colleagues' confusion, and having a go at this economic ecumenicism. He had been interested, he said, for many years in British industry and several times he had heard free traders urge the British workers to make the sacrifices necessary to compete in the great American market (so now, perhaps someone ought to urge American workers to make the sacrifices necessary to compete in the great world market, especially against companies that pay their 18-22 year old female workers $0.25 per hour, which, any Republican will assure us, is a wage such workers are HAPPY to get, for the privelege of working 12-16 hours a day, 6-7 days a week). Every time, as soon as they made a little progress, the Congress set up a howl about cheap foreign labor and raised the tariff to new heights, the last time﻿ in 1930. He was not going home to flimflam the workers again. Mr. Hull had done a fine job, but imports during the Depression and he war had not been a big factor in the American market. Would we guarantee that if Europe sought to balance its payments by exports to the United States, congress would let them come in? There was a good deal of sense in this and plenty of vigor. "Even the ranks of Tuscany could scarce forebear to cheer."

However, this polemical exchange did convince the British that at least the principal American and Canadian representatives must be told [about the devaluation] ...

Once we knew the facts, our meeting got down to the business of improving the British economic position. ... [D]ue to an [unexpected] improvement in the [economy] ... the devaluation was more effective than any of us had thought it would be ... [t]his [ensuing] recession proved to be short-lived; our recovery and cheaper sterling prices increased our buying. This, when the Korean war started in the middle of the next year, created problems through its excesses.

Before recovery had started, however, we talked among ourselves about Britain's still-unsolved basic dilemma, a British politician's nightmare. This was to tell the workers and voters (and still hope to stay in office) that they must work harder and get paid less (we don't do this in the U.S. -- rather, we tell the workers they must work harder and get paid the same, and have their benefits reduced, or even eliminated ... and our workers are so terrified of losing their jobs, that, by and large, they keep re-electing the same representatives to office) --for a time, at least--and, at the same time, tell the Commonwealth that their sterling deposits were really long-term investments and not available in cash of goods on demand. It seemed to us that, before the fundamental weakness of the British financial situation could be cured (the biggest weakness being that they could not print U.S. currency to keep up their reserves), there must be some refunding of the sterling balances and, with outside help, some reform of the British role as the international banker and its incorporation in a larger and more inherently solvent arrangement. but this was something that one could not usefully discuss with the British except in time of crisis, and the recovery in 1950 ended that. The problem, however, still remains and darkens the entrance to the Common Market.

[I]n February 2006 ... an investor who went from the stock market to the bond market was like a small, furry creature raised on an island without predators removed to a pit full of pythons. It was possible to get ripped off by the big Wall Street firms in the stock market, but you really had to work at it. The entire market traded on screens, so you always had a clear view of the price of the stock of any given company. The stock market was not only tranparent but heavily policed. You wouldn't expect a Wall Street trader to share with you his every negative thought about public companies, but you could expect he wouldn't work very hard to sucker you with outright lies, or blatantly use inside information to trade against you, mainly becauser there was at least a chance he'd be caught if he did. The presence of millions of small investors had politicized the stock market. It had been legislated and regulated to at least seem fair.

The bond market, because it consisted mainly of big institutional investors, experienced no similarly populist political pressure. Even as it came to dwarf the stock market, the bond market eluded serious reulation. Bond salesmen could say and do anything without fear that they'd be reported to some authority. bond traders could exploit inside information without worrying that they would be caught. Bond technicians could dream up ever more complicated securities without worrying too much about government regulation--one reason why so many derivatives had been derived, one way or another, from bonds. The bigger, more liquid end of the bond market--the market for U.S. Treasury bonds, for example--traded on screens, but in many cases the only way to determine if the price some bond trader had given you was even close to fair was to call around and hope to find some other bond trader making a market in that particular obscure security. The opacity and complexity of the bond market was, for big Wall Street firms, a huge advantage. The bond market customer lived in perpetual fear of what he didn't know. If Wall Street bond departments were increasingly the source of Wall Street profits, it was in part because of this: In the bond market it was still possible to make huge sums of money from the fear, and the ignorance, of customers.

How Today’s Fiscal Austerity is Reminiscent of World War I’s Economic Misunderstandings

America’s Deceptive 2012 Fiscal Cliff

by MICHAEL HUDSON

When World War I broke out in August 1914, economists on both sides forecast that hostilities could not last more than about six months. Wars had grown so expensive that governments quickly would run out of money. It seemed that if Germany could not defeat France by springtime, the Allied and Central Powers would run out of savings and reach what today is called a fiscal cliff and be forced to negotiate a peace agreement.

But the Great War dragged on for four destructive years. European governments did what the United States had done after the Civil War broke out in 1861 when the Treasury printed greenbacks. They paid for more fighting simply by printing their own money. Their economies did not buckle and there was no major inflation. That would happen only after the war ended, as a result of Germany trying to pay reparations in foreign currency. This is what caused its exchange rate to plunge, raising import prices and hence domestic prices. The culprit was not government spending on the war itself (much less on social programs).

But history is written by the victors, and the past generation has seen the banks and financial sector emerge victorious. Holding the bottom 99% in debt, the top 1% are now in the process of subsidizing a deceptive economic theory to persuade voters to pursue policies that benefit the financial sector at the expense of labor, industry, and democratic government as we know it.

Wall Street lobbyists blame unemployment and the loss of industrial competitiveness on government spending and budget deficits – especially on social programs – and labor’s demand to share in the economy’s rising productivity. The myth (perhaps we should call it junk economics) is that (1) governments should not run deficits (at least, not by printing their own money), because (2) public money creation and high taxes (at lest on the wealthy) cause prices to rise. The cure for economic malaise (which they themselves have caused), is said to be less public spending, along with more tax cuts for the wealthy, who euphemize themselves as “job creators.” Demanding budget surpluses, bank lobbyists promise that banks can provide the economy with enough purchasing power to grow. Then, when this ends in crisis, they insist that austerity can squeeze out enough income to enable private-sector debts to be paid.

The reality is that when banks load the economy down with debt, this leaves less to spend on domestic goods and services while driving up housing prices (and hence the cost of living) with reckless credit creation on looser lending terms. Yet on top of this debt deflation, bank lobbyists urge fiscal deflation: budget surpluses rather than pump-priming deficits. The effect is to further reduce private-sector market demand, shrinking markets and employment. Governments fall deeper into distress, and are told to sell off land and natural resources, public enterprises, and other assets. This creates a lucrative market for bank loans to finance privatization on credit. This explains why financial lobbyists back the new buyers’ right to raise the prices they charge for basic needs, creating a united front to endorse rent extraction. The effect is to enrich the financial sector owned by the 1% in ways that indebt and privatize the economy at large – individuals, business and the government itself.

This policy was exposed as destructive in the late 1920s and early 1930s when John Maynard Keynes, Harold Moulton and a few others countered the claims of Jacques Rueff and Bertil Ohlin that debts of any magnitude could be paid if governments would impose deep enough austerity and suffering. This is the doctrine adopted by the International Monetary

Fund to impose on Third World debtors since the 1960s, and by European neoliberals defending creditors imposing austerity on Ireland, Greece, Spain and Portugal.

This pro-austerity mythology aims to distract the public from asking why peacetime governments can’t simply print the money they need. Given the option of printing money instead of levying taxes, why do politicians only create new spending power for the purpose of waging war and destroying property, not to build or repair bridges, roads and other public infrastructure? Why should the government tax employees for future retirement payouts, but not Wall Street for similar user fees and financial insurance to build up a fund to pay for future bank over-lending crises? For that matter, why doesn’t the U.S. Government print the money to pay for Social Security and medical care, just as it created new debt for the $13 trillion post-2008 bank bailout? (I will return to this question below.)

The answer to these questions has little to do with markets, or with monetary and tax theory. Bankers claim that if they have to pay more user fees to pre-fund future bad-loan claims and deposit insurance to save the Treasury or taxpayers from being stuck with the bill, they will have to charge customers more – despite their current record profits, which seem to grab everything they can get. But they support a double standard when it comes to taxing labor.

Shifting the tax burden onto labor and industry is achieved most easily by cutting back public spending on the 99%. That is the root of the December 2012 showdown over whether to impose the anti-deficit policies proposed by the Bowles-Simpson commission of budget cutters whom President Obama appointed in 2010. Shedding crocodile tears over the government’s failure to balance the budget, banks insist that today’s 15.3% FICA wage withholding be raised – as if this will not raise the break-even cost of living and drain the consumer economy of purchasing power. Employers and their work force are told to save in advance for Social Security or other public programs. This is a disguised income tax on the bottom 99%, whose proceeds are used to reduce the budget deficit so that taxes can be cut on finance and the 1%. To paraphrase Leona Helmsley’s quip that “Only the little people pay taxes,” the post-2008 motto is that only the 99% have to suffer losses, not the 1% as debt deflation plunges real estate and stock market prices to inaugurate a Negative Equity economy while unemployment rates soar.

There is no more need to save in advance for Social Security than there is to save in advance to pay for war. Selling Treasury bonds to pay for retirees has the identical monetary and fiscal effect of selling newly printed securities. It is a charade – to shift the tax burden onto labor and industry. Governments need to provide the economy with money and credit to expand markets and employment. They do this by running budget deficits, and this can be done by creating their own money. That is what banks oppose, accusing it of leading to hyperinflation rather than help economies grow.

Their motivation for this wrong accusation is self-serving and their logic is deceptive. Bankers always have fought to block government from creating its own money – at least under normal peacetime conditions. For many centuries, government bonds were the largest and most secure investment for the financial elites that hold most savings. Investment bankers and brokers monopolized public finance, at substantial underwriting commissions. The market for stocks and corporate bonds was rife with fraud, dominated by insiders for the railroads and great trusts being organized by Wall Street, and the canal ventures organized by French and British stockbrokers.

However, there was little alternative to governments creating their own money when the costs of waging an international war far exceeded the volume of national savings or tax revenue available. This obvious need quieted the usual opposition mounted by bankers to limit the public monetary option. It shows that governments can do more under force majeur emergencies than under normal conditions. And the September 2008 financial crisis provided an opportunity for the U.S. and European governments to create new debt for bank bailouts. This turned out to be as expensive as waging a war. It was indeed a financial war. Banks already had captured the regulatory agencies to engage in reckless lending and a wave of fraud and corruption not seen since the 1920s. And now they were holding economies hostage to a break in the chain of payments if they were not bailed out for their speculative gambles, junk mortgages and fraudulent loan packaging.

Their first victory was to disable the ability – or at least the willingness – of the Treasury, Federal Reserve and Comptroller of the Currency to regulate the financial sector. Goldman Sachs, Citicorp and their fellow Wall Street giants hold veto power the appointment of key administrators at these agencies. They used this beachhead to weed out nominees who might not favor their interests, preferring ideological deregulators in the stripe of Alan Greenspan and Tim Geithner. As John Kenneth Galbraith quipped, a precondition for obtaining a central bank post is tunnel vision when it comes to understanding that governments can create their credit as readily as banks can. What is necessary is for one’s political loyalties to lie with the banks.

In the post-2008 financial wreckage it took only a series of computer keystrokes for the U.S. Government to create $13 trillion in debt to save banks from suffering losses on their reckless real estate loans (which computer models pretended would make banks so rich that they could pay their managers enormous salaries, bonuses and stock options), insurance bets gone bad (underpricing risk to win business to pay their managers enormous salaries and bonuses), arbitrage gambles and outright fraud (to give the illusion of earnings justifying enormous salaries, bonuses and stock options). The $800 billion Troubled Asset Relief Program (TARP) and $2 trillion of Federal Reserve “cash for trash” swaps enabled the banks to continue their remuneration of executives and bondholders with hardly a hiccup – while incomes and wealth plunged for the remaining 99% of Americans.

A new term, Casino Capitalism, was coined to describe the transformation that finance capitalism was undergoing in the post-1980 era of deregulation that opened the gates for banks to do what governments hitherto did in time of war: create money and new public debt simply by “printing it” – in this case, electronically on their computer keyboards.

Taking the insolvent Fannie Mae and Freddie Mac mortgage financing agencies onto the public balance sheet for $5.2 trillion accounted for over a third of the $13 trillion bailout. This saved their bondholders from having to suffer losses from the fraudulent appraisals on the junk mortgages with which Countrywide, Bank of America, Citibank and other “too big to fail” banks had stuck them. This enormous debt increase was done without raising taxes. In fact, the Bush administration cut taxes, giving the largest cuts to the highest income and wealth brackets who were its major campaign contributors. Special tax privileges were given to banks so that they could “earn their way out of debt” (and indeed, out of negative equity).[1] The Federal Reserve gave a free line of credit (Quantitative Easing) to the banking system at only 0.25% annual interest by 2011 – that is, one quarter of a percentage point, with no questions asked about the quality of the junk mortgages and other securities pledged as collateral at their full face value, which was far above market price.

This $13 trillion debt creation to save banks from having to suffer a loss was not accused of threatening economic stability. It enabled them to resume paying exorbitant salaries and bonuses, dividends to bondholders and also to pay counterparties on casino-capitalist arbitrage bets. These payments have helped the 1% receive a reported 93% of the gains in income since 2008. The bailout thus polarized the economy, giving the financial sector more power over labor and consumers, industry and the government than has been the case since the late 19th-century Gilded Age.

All this makes today’s financial war much like the aftermath of World War I and countless earlier wars. The effect is to impoverish the losers, appropriate hitherto public assets for the victors, and impose debt service and taxes much like levying tribute. “The financial crisis has been as economically devastating as a world war and may still be a burden on ‘our grandchildren,’” Bank of England official Andrew Haldane recently observed. “‘In terms of the loss of incomes and outputs, this is as bad as a world war.’ he said. The rise in government debt has prompted calls for austerity – on the part of those who did not receive the giveaway. ‘It would be astonishing if people weren’t asking big questions about where finance has gone wrong.’”[2]

But as long as the financial sector is winning its war against the economy at large, it prefers that people believe that There Is No Alternative. Having captured mainstream economics as well as government policy, finance seeks to deter students, voters and the media from questioning whether the financial system really needs to be organized in the way it is. Once such a line of questioning is pursued, people may realize that banking, pension and Social Security systems and public deficit financing do not have to be organized in the way they are. There are better alternatives to today’s road to austerity and debt peonage.

To be continued.

Michael Hudson’s book summarizing his economic theories, “The Bubble and Beyond,” is available on Amazon. His latest book is Finance Capitalism and Its Discontents. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. He can be reached via his website, mh@michael-hudson.com

Notes.

[1] No such benefits were given to homeowners whose real estate fell into negative equity. For the few who received debt write-downs to current market value, the credit was treated as normal income and taxed!

[2] Philip Aldrick, “Loss of income caused by banks as bad as a ‘world war’, says BoE’s Andrew Haldane,” The Telegraph, December 3, 2012. Mr. Haldane is the Bank’s executive director for financial stability.

Today’s economic warfare is not the kind waged a century ago between labor and its industrial employers. Finance has moved to capture the economy at large, industry and mining, public infrastructure (via privatization) and now even the educational system. (At over $1 trillion, U.S. student loan debt came to exceed credit-card debt in 2012.) The weapon in this financial warfare is no longer military force. The tactic is to load economies (governments, companies and families) with debt, siphon off their income as debt service and then foreclose when debtors lack the means to pay. Indebting government gives creditors a lever to pry away land, public infrastructure and other property in the public domain. Indebting companies enables creditors to seize employee pension savings. And Indebting labor means that it no longer is necessary to hire strikebreakers to attack union organizers and strikers.

Workers have become so deeply indebted on their home mortgages, credit cards and other bank debt that they fear to strike or even to complain about working conditions. Losing work means missing payments on their monthly bills, enabling banks to jack up interest rates to levels that used to be deemed usurious. So debt peonage and unemployment loom on top of the wage slavery that was the main focus of class warfare a century ago. And to cap matters, credit-card bank lobbyists have rewritten the bankruptcy laws to curtail debtor rights, and the referees appointed to adjudicate disputes brought by debtors and consumers are subject to veto from the banks and businesses that are mainly responsible for inflicting injury.

The aim of financial warfare is not merely to acquire land, natural resources and key infrastructure rents as in military warfare; it is to centralize creditor control over society. In contrast to the promise of democratic reform nurturing a middle class a century ago, we are witnessing a regression to a world of special privilege in which one must inherit wealth in order to avoid debt and job dependency.

The emerging financial oligarchy seeks to shift taxes off banks and their major customers (real estate, natural resources and monopolies) onto labor. Given the need to win voter acquiescence, this aim is best achieved by rolling back everyone’s taxes. The easiest way to do this is to shrink government spending, headed by Social Security, Medicare and Medicaid. Yet these are the programs that enjoy the strongest voter support. This fact has inspired what may be called the Big Lie of our epoch: the pretense that governments can only create money to pay the financial sector, and that the beneficiaries of social programs should be entirely responsible for paying for Social Security, Medicare and Medicaid, not the wealthy. This Big Lie is used to reverse the concept of progressive taxation, turning the tax system into a ploy of the financial sector to levy tribute on the economy at large.

Financial lobbyists quickly discovered that the easiest ploy to shift the cost of social programs onto labor is to conceal new taxes as user fees, using the proceeds to cut taxes for the elite 1%. This fiscal sleight-of-hand was the aim of the 1983 Greenspan Commission. It confused people into thinking that government budgets are like family budgets, concealing the fact that governments can finance their spending by creating their own money. They do not have to borrow, or even to tax (at least, not tax mainly the 99%).

The Greenspan tax shift played on the fact that most people see the need to save for their own retirement. The carefully crafted and well-subsidized deception at work is that Social Security requires a similar pre-funding – by raising wage withholding. The trick is to convince wage earners it is fair to tax them more to pay for government social spending, yet not also to ask the banking sector to pay similar a user fee to pre-save for the next time it itself will need bailouts to cover its losses. Also asymmetrical is the fact that nobody suggests that the government set up a fund to pay for future wars, so that future adventures such as Iraq or Afghanistan will not “run a deficit” to burden the budget. So the first deception is to treat only Social Security and medical care as user fees. The second is to aggravate matters by insisting that such fees be paid long in advance, by pre-saving.

There is no inherent need to single out any particular area of public spending as causing a budget deficit if it is not pre-funded. It is a travesty of progressive tax policy to only oblige workers whose wages are less than (at present) $105,000 to pay this FICA wage withholding, exempting higher earnings, capital gains, rental income and profits. The raison d’être for taxing the 99% for Social Security and Medicare is simply to avoid taxing wealth, by falling on low wage income at a much higher rate than that of the wealthy. This is not how the original U.S. income tax was created at its inception in 1913. During its early years only the wealthiest 1% of the population had to file a return. There were few loopholes, and capital gains were taxed at the same rate as earned income.

The government’s seashore insurance program, for instance, recently incurred a $1 trillion liability to rebuild the private beaches and homes that Hurricane Sandy washed out. Why should this insurance subsidy at below-commercial rates for the wealthy minority who live in this scenic high-risk property be treated as normal spending, but not Social Security? Why save in advance by a special wage tax to pay for these programs that benefit the general population, but not levy a similar “user fee” tax to pay for flood insurance for beachfront homes or war? And while we are at it, why not save another $13 trillion in advance to pay for the next bailout of Wall Street when debt deflation causes another crisis to drain the budget?

But on whom should we levy these taxes? To impose user fees for the beachfront reconstruction would require a tax falling mainly on the wealthy owners of such properties. Their dominant role in funding the election campaigns of the Congressmen and Senators who draw up the tax code suggests why they are able to avoid prepaying for the cost of rebuilding their seashore property. Such taxation is only for wage earners on their retirement income, not the 1% on their own vacation and retirement homes.

By not raising taxes on the wealthy or using the central bank to monetize spending on anything except bailing out the banks and subsidizing the financial sector, the government follows a pro-creditor policy. Tax favoritism for the wealthy deepens the budget deficit, forcing governments to borrow more. Paying interest on this debt diverts revenue from being spent on goods and services. This fiscal austerity shrinks markets, reducing tax revenue to the brink of default. This enables bondholders to treat the government in the same way that banks treat a bankrupt family, forcing the debtor to sell off assets – in this case the public domain as if it were the family silver, as Britain’s Prime Minister Harold MacMillan characterized Margaret Thatcher’s privatization sell-offs.

In an Orwellian doublethink twist this privatization is done in the name of free markets, despite being imposed by global financial institutions whose administrators are not democratically elected. The International Monetary Fund (IMF), European Central Bank (ECB) and EU bureaucracy treat governments like banks treat homeowners unable to pay their mortgage: by foreclosing. Greece, for example, has been told to start selling off prime tourist sites, ports, islands, offshore gas rights, water and sewer systems, roads and other property.

Sovereign governments are, in principle, free of such pressure. That is what makes them sovereign. They are not obliged to settle public debts and budget deficits by asset selloffs. They do not need to borrow more domestic currency; they can create it. This self-financing keeps the national patrimony in public hands rather than turning assets over to private buyers, or having to borrow from banks and bondholders.

To be continued.

This is the second installment of Michael Hudson’s ground-breaking report on the state of the economy. Click here to read Part One.

Michael Hudson’s book summarizing his economic theories, “The Bubble and Beyond,” is available on Amazon. His latest book is Finance Capitalism and Its Discontents. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. He can be reached via his website, mh@michael-hudson.com